REVISITING THE DEPARTMENT OF DEFENSE SBIR FAST TRACK INITIATIVE

Committee for Capitalizing on Science, Technology, and Innovation: An Assessment of the Small Business Innovation Research Program

Policy and Global Affairs

Charles W. Wessner, Editor

NATIONAL RESEARCH COUNCIL OF THE NATIONAL ACADEMIES

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Committee for Capitalizing on Science, Technology, and Innovation: An Assessment of the Small Business Innovation Research Program Policy and Global Affairs Charles W. Wessner, Editor

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THE NATIONAL ACADEMIES PRESS 500 Fifth Street, N.W. Washington, DC 20001 NOTICE: The project that is the subject of this report was approved by the Governing Board of the National Research Council, whose members are drawn from the Councils of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The members of the committee responsible for the report were chosen for their special competences and with regard for appropriate balance. This study was supported by Contract/Grant No. DASW01-02C-0039 between the National Academy of Sciences and U.S. Department of Defense. Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the author(s) and do not necessarily reflect the views of the organizations or agencies that provided support for the project. International Standard Book Number-13: 978-0-309-13211-4 International Standard Book Number-10: 0-309-13211-8 Limited copies are available from the Policy and Global Affairs Division, National Research Council, 500 Fifth Street, N.W., Washington, D.C. 20001; 202-334-1529. Additional copies of this report are available from the National Academies Press, 500 Fifth Street, N.W., Lockbox 285, Washington, DC 20055; (800) 624-6242 or (202) 334-3313 (in the Washington metropolitan area); Internet, http://www.nap.edu. Copyright 2009 by the National Academy of Sciences. All rights reserved. Printed in the United States of America

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The National Academy of Sciences is a private, nonprofit, self-perpetuating society of distinguished scholars engaged in scientific and engineering research, dedicated to the furtherance of science and technology and to their use for the general welfare. Upon the authority of the charter granted to it by the Congress in 1863, the Academy has a mandate that requires it to advise the federal government on scientific and technical matters. Dr. Ralph J. Cicerone is president of the National Academy of Sciences. The National Academy of Engineering was established in 1964, under the charter of the National Academy of Sciences, as a parallel organization of outstanding engineers. It is autonomous in its administration and in the selection of its members, sharing with the National Academy of Sciences the responsibility for advising the federal government. The National Academy of Engineering also sponsors engineering programs aimed at meeting national needs, encourages education and research, and recognizes the superior achievements of engineers. Dr. Charles M. Vest is president of the National Academy of Engineering. The Institute of Medicine was established in 1970 by the National Academy of Sciences to secure the services of eminent members of appropriate professions in the examination of policy matters pertaining to the health of the public. The Institute acts under the responsibility given to the National Academy of Sciences by its congressional charter to be an adviser to the federal government and, upon its own initiative, to identify issues of medical care, research, and education. Dr. Harvey V. Fineberg is president of the Institute of Medicine. The National Research Council was organized by the National Academy of Sciences in 1916 to associate the broad community of science and technology with the Academy’s purposes of furthering knowledge and advising the federal government. Functioning in accordance with general policies determined by the Academy, the Council has become the principal operating agency of both the National Academy of Sciences and the National Academy of Engineering in providing services to the government, the public, and the scientific and engineering communities. The Council is administered jointly by both Academies and the Institute of Medicine. Dr. Ralph J. Cicerone and Dr. Charles M. Vest are chair and vice chair, respectively, of the National Research Council. www.national-academies.org

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Committee for Capitalizing on Science, Technology, and Innovation: An Assessment of the Small Business Innovation Research Program Chair Jacques S. Gansler (NAE) Roger C. Lipitz Chair in Public Policy and Private Enterprise and Director of the Center for Public Policy and Private Enterprise School of Public Policy University of Maryland David B. Audretsch M. Christina Gabriel Distinguished Professor and Director, Innovation Economy Ameritech Chair The Heinz Endowments of Economic Development Director, Institute for Development Trevor O. Jones (NAE) Strategies Founder and Chairman Indiana University Electrosonics Medical, Inc. Gene Banucci Charles E. Kolb Executive Chairman President ATMI, Inc. Aerodyne Research, Inc. Jon Baron Henry Linsert, Jr. Executive Director CEO Coalition for Evidence-Based Columbia Biosciences Corporation Policy W. Clark McFadden Michael Borrus Partner Founding General Partner Dewey & LeBoeuf, LLP X/Seed Capital Duncan T. Moore (NAE) Gail Cassell (IOM) Kingslake Professor of Optical Vice President, Scientific Affairs Engineering and Distinguished Lilly Research University of Rochester Scholar for Infectious Diseases Eli Lilly and Company Kent Murphy President and CEO Elizabeth Downing Luna Innovations CEO 3D Technology Laboratories continued v

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Linda F. Powers Charles Trimble (NAE) Managing Director CEO, retired Toucan Capital Corporation Trimble Navigation Tyrone Taylor Patrick Windham President President Capitol Advisors Windham Consulting on Technology, LLC PROJECT STAFF Charles W. Wessner Study Director McAlister T. Clabaugh Adam H. Gertz Program Officer Program Associate David E. Dierksheide Sujai J. Shivakumar Program Officer Senior Program Officer vi

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vii RESEARCH TEAM Zoltan Acs Irwin Feller University of Baltimore American Association for the Advancement of Science Alan Anderson Consultant David H. Finifter The College of William and Mary Philip A. Auerswald George Mason University Michael Fogarty University of Portland Robert-Allen Baker Vital Strategies, LLC Robin Gaster North Atlantic Research Robert Berger Robert Berger Consulting, LLC Albert N. Link University of North Carolina Grant Black University of Indiana South Bend Rosalie Ruegg TIA Consulting Peter Cahill BRTRC, Inc. Paula E. Stephan Georgia State University Dirk Czarnitzki University of Leuven Andrew Toole Rutgers University Julie Ann Elston Oregon State University Nicholas Vonortas George Washington University vii

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POLICY AND GLOBAL AFFAIRS Ad hoc Oversight Board for Capitalizing on Science, Technology, and Innovation: An Assessment of the Small Business Innovation Research Program Robert M. White (NAE), Chair University Professor Emeritus Electrical and Computer Engineering Carnegie Mellon University Anita K. Jones (NAE) Mark B. Myers Lawrence R. Quarles Professor Senior Vice President, retired of Engineering and Applied Science Xerox Corporation School of Engineering and Applied Science University of Virginia viii

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Contents PREFACE xi SUMMARY 1 1 ASSESSING THE SBIR FAST TRACK AND PHASE II ENHANCEMENT PROGRAMS AT THE DEPARTMENT OF DEFENSE 7 2 SURVEY ANALYSIS 28 2.1 Summary of Survey Findings, 28 2.1.1 Survey Demographics, 29 2.1.2 Firm and Project Characteristics, 32 2.1.3 Project Outcomes, 34 2.1.4 Phase I-Phase II Funding Gap and Fast Track, 37 2.2 Detailed Survey Results, 38 2.2.1 Phase II Completion, 38 2.2.2 Comparison of Firm Metrics, 39 2.2.3 Would Small Firms Have Commercialized Without SBIR?, 47 2.2.4 Actual and Expected Sales in Phase III, 49 2.2.5 Impact of Funding Gaps, 56 2.2.6 Additional Developmental Funding, 60 2.2.7 Knowledge Effects: Patents and Scientific Publications, 64 2.2.8 Impact of the Use of Fast Track and Phase II Enhancement on Responding Awards, 65 2.2.9 Reasons for Not Submitting Fast Track and Phase II Enhancement Proposals, 69 2.2.10 Dilution of Ownership, 71 3 FINDINGS AND RECOMMENDATIONS 74 ix

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x CONTENTS APPENDIXES A Survey Methodology and Administration 81 B Fast Track/Phase II Enhancement Firm Survey Summary of Responses 95 C Phase II Survey for Fast Track Study Summary of Responses 101 D Update of SBIR Fast Track Case Studies 115 E Bibliography 177

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Preface Today’s knowledge economy is driven in large part by the nation’s capacity to innovate. One of the defining features of the U.S. economy is a high level of entrepreneurial activity. Entrepreneurs in the United States see opportunities and are willing and able to take on risk to bring new welfare enhancing, wealth generating technologies to the market. Yet, while innovation in areas such as genomics, bioinformatics, and nanotechnology present new opportunities, converting these ideas into innovations for the market involves substantial challenges.1 The American capacity for innovation can be strengthened by addressing the challenges faced by entrepreneurs. Public- private partnerships offer one means of helping entrepreneurs bring new ideas to market. The Small Business Innovation Research (SBIR) program is one of the largest examples of U.S. public-private partnerships. The underlying premise of the program is that small businesses are a strong source for new ideas, but that they often lack financial support in the early stages of product development. Founded in 1982, SBIR was designed to encourage small business to develop new processes and products and to provide quality research in support of the many missions of the U.S. government. By including qualified small technologically oriented businesses in the nation's R&D effort, SBIR grants stimulate innovative new technologies to help agencies meet the specific research and development needs of the nation in many areas, including health, the environment, and national defense. 1 See Lewis M. Branscomb, Kenneth P. Morse, Michael J. Roberts, and Darin Boville, Managing Technical Risk: Understanding Private Sector Decision Making on Early Stage Technology Based Projects, Washington, DC: Department of Commerce/National Institute of Standards and Technology, 2000. xi

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PREFACE xii PROJECT ANTECEDENTS This assessment of the SBIR Fast Track program at the Department of Defense follows directly from an earlier analysis of public-private partnerships by the National Research Council’s Board on Science, Technology, and Economic Policy (STEP). Under the direction of Gordon Moore, Chairman Emeritus of Intel, the NRC Committee on Government Industry Partnerships prepared eleven volumes reviewing the drivers of cooperation among industry, universities, and government; operational assessments of current programs; emerging needs at the intersection of biotechnology and information technology; the current experience of foreign government partnerships and opportunities for international cooperation; and the changing roles of government laboratories, universities, and other research organizations in the national innovation system. 2 The Moore Committee’s analysis of public-private partnerships included reviews of the SBIR program. Drawing from expert knowledge at a 1998 workshop held at the National Academy of Sciences, the first report, The Small Business Innovation Research Program: Challenges and Opportunities, examined the origins of the program and identified some operational challenges critical to the program’s future effectiveness.3 The report also highlighted the relative paucity of research on this program. THE 2000 ASSESSMENT OF FAST TRACK AT DoD Following this initial report, the Department of Defense asked the NRC to assess the Department’s Fast Track Initiative in comparison with the operation of its regular SBIR program. The resulting report, The Small Business Innovation Research Program: An Assessment of the Department of Defense Fast Track Initiative, was the first comprehensive, external assessment of the Department of Defense’s program. 4 The study, which involved substantial case study and survey research, found that “the SBIR program is contributing to the achievement of the Department of Defense mission goals.”5 It also found that DoD’s Fast Track Initiative was achieving its objective of greater commercialization and recommended that the program be continued and expanded where appropriate.6 The report also recommended that the SBIR 2 For a summary analysis of best practice among U.S. public-private partnerships, see National Research Council, Government-Industry Partnerships for the Development of New Technologies: Summary Report, Charles W. Wessner, ed., Washington, DC: The National Academies Press, 2003. 3 See National Research Council, The Small Business Innovation Research Program: Challenges and Opportunities, Charles W. Wessner, ed., Washington, DC: National Academy Press, 1999. 4 See SBIR Reauthorization Act of 2000 (H.R. 5667, Section 108). 5 See National Research Council, The Small Business Innovation Research Program: An Assessment of the Department of Defense Fast Track Initiative, Charles W. Wessner, ed., Washington, DC: National Academy Press, 2000, p. 32. 6 See National Research Council, The Small Business Innovation Research Program: An Assessment of the Department of Defense Fast Track Initiative, op. cit. Given that virtually no published

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PREFACE xiii program overall would benefit from further research and analysis, a perspective adopted by the U.S. Congress. SBIR REAUTHORIZATION AND THE CONGRESSIONAL REQUEST FOR REVIEW As a part of the 2000 reauthorization of the SBIR program, Congress called for a review of the SBIR programs of the agencies that account collectively for 96 percent of program funding. As noted, the five agencies meeting this criterion, by size of program, are the Departments of Defense, The National Institutes of Health, the National Aeronautics and Space Administration, the Department of Energy, and the National Science Foundation. HR 5667 directed the NRC to evaluate the quality of SBIR research and evaluate the SBIR program’s value to the agency mission. It called for an assessment of the extent to which SBIR projects achieve some measure of commercialization, as well as an evaluation of the program’s overall economic and noneconomic benefits. It also called for additional analysis as required to support specific recommendations on areas such as measuring outcomes for agency strategy and performance, increasing federal procurement of technologies produced by small business, and overall improvements to the SBIR program. To guide this study, the National Research Council drew together an expert committee that includes eminent economists, small business men and women, and venture capitalists. The membership of this committee is listed in the front matter of this volume. The Steering Committee in turn drew on a distinguished team of researchers to, among other tasks, administer surveys and case studies, and to develop statistical information about the program. The Front Matter to this volume lists the membership of this research team. A SECOND “SNAPSHOT” OF FAST TRACK Capitalizing on the ongoing assessment, and partway through the study, the Department of Defense requested the NRC to conduct a follow up assessment of its SBIR Fast Track program. The NRC accordingly developed and deployed a survey that drew on and refined the methodology developed in its 2000 study of SBIR Fast Track.7 This report thus captures a second snapshot of the contributions of the Department of Defense Fast Track program. analytical literature existed on SBIR, this Fast Track study pioneered research in this area, developing extensive case studies and newly developed surveys. 7 See National Research Council, The Small Business Innovation Research Program: An Assessment of the Department of Defense Fast Track Initiative, op. cit.

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PREFACE xiv Statement of Task This report presents the NRC review of the operation of the goals, operations, and achievements of the SBIR Fast Track program in operation at the Department of Defense. Building on the results of a 2000 NRC report on the DoD Fast Track program and drawing on survey and case study analysis, the NRC Committee will assess the Fast Track program in light of its goals, taking into account the program’s administrative and other costs, and possible alternatives (e.g., Phase II Enhancement). The report, including empirical analysis and case study results, provides the basis for the Committee’s findings and recommendations. While the text of the original statement of task (above) refers to Fast Track and the Phase II Enhancement programs as alternatives, it is important to note that they are in fact complements. The Fast Track program is designed to improve commercialization by reducing significant gaps in funding between Phases I and II for SBIR projects. The Phase II Enhancement program is designed to encourage the transition of SBIR research into DoD acquisition programs and/or into the private sector after Phase II. This report, therefore, does not seek to determine if the Fast Track program is better than the Phase II Enhancement program or vice-versa. The report recognizes that these two initiatives are designed to address different needs and determines whether each of them provides measurable benefits to the DoD SBIR program. This report complements a series of reports being published by the National Academies in response to the congressional request. The series includes reports on the Small Business Innovation Research Program at the Department of Defense, the National Institutes of Health, the Department of Energy, the National Aeronautics and Space Administration, and the National Science Foundation—the five agencies responsible for 96 percent of the program’s operations.8 This series is capped by an Overview Report that summarizes the program’s operations across the federal government.9 Other reports in the series include a summary of the 2002 conference that launched the study, and a summary of the 2005 conference on SBIR and the Phase III Challenge of Commercialization at the Department of Defense and NASA.10 8 See especially National Research Council, An Assessment of SBIR at the Department of Defense, Charles W. Wessner, ed., Washington, DC: The National Academies Press, 2009. 9 See National Research Council, An Assessment of the Small Business Innovation Research Program, Charles W. Wessner, ed., Washington, DC: National Academies Press, 2008. 10 National Research Council, SBIR and the Phase III Challenge of Commercialization, Charles W. Wessner, ed., Washington, DC: The National Academies Press, 2007.

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PREFACE xv ACKNOWLEDGMENTS On behalf of the National Academies, we express our appreciation and recognition for the insights, experiences, and perspectives made available by the survey respondents. We are also indebted to Jeffrey Bond, the former SBIR Program Administrator at the Department of Defense and, in particular, to Michael Caccuitto who was until recently the SBIR Program Manager for the Department of Defense, for their encouragement, assistance, and patience during the course of this study. The Committee specially recognizes Pete Cahill of BRTRC, Inc., for his key role in preparing this report. His valuable insights were important contributions to this analysis. Thanks are also due to Rosalie Ruegg of TIA Consulting for her work on the case studies. NATIONAL RESEARCH COUNCIL REVIEW This report has been reviewed in draft form by individuals chosen for their diverse perspectives and technical expertise, in accordance with procedures approved by the National Academies’ Report Review Committee. The purpose of this independent review is to provide candid and critical comments that will assist the institution in making its published report as sound as possible and to ensure that the report meets institutional standards for objectivity, evidence, and responsiveness to the study charge. The review comments and draft manuscript remain confidential to protect the integrity of the process. We wish to thank the following individuals for their review of this report: William Bean, College of William & Mary; Jeffrey Bond, Association for Manufacturing Technology; Robert M. Groves, University of Michigan; Bruce Held, RAND Corporation; ML Mackey, Beacon Interactive Systems; Julia Melkers, Georgia Institute of Technology; David Roessner, Georgia Institute of Technology; and Todd Watkins, Lehigh University. Although the reviewers listed above have provided many constructive comments and suggestions, they were not asked to endorse the conclusions or recommendations, nor did they see the final draft of the report before its release. The review of this report was overseen by Robert Frosch, Harvard University. Appointed by the National Academies, he was responsible for making certain that an independent examination of this report was carried out in accordance with institutional procedures and that all review comments were carefully considered. Responsibility for the final content of this report rests entirely with the authoring committee and the institution. Jacques S. Gansler Charles W. Wessner

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